PCM NOTES LECTURE 9-2

Classroom Logistics

• Sign-up: If you're interested and haven't signed up, email Lisa Wright directly to get on the list for next Tuesday.

• Course materials: Brightspace has the cases for next week and the topics for your three-page paper.

• Acronym challenge (recap): The challenge was not done last week. At the start of class, three topics are chosen and an acronym is written on the board. Students have a minute to solve it.

• Scoring and incentives: If you solve the acronym, you earn 1 point; if you don’t, Scott and the instructor (the speaker) get a point. The score will be tracked over the next six weeks.

• Consequence if students win: The grading scale would be adjusted so that an A is 90 instead of 94 (a 4-point absolute drop).

• Ethical framing: The instructor referred to this as a form of “delicate cheating” (a playful comment about the incentive structure).

• Practice and pacing: The instructor confirms the acronyms are designed to be fairly easy that day, and asks students to attempt letters out of order if helpful.

• Example prompts and clues: Mentions of a topic like "Vanderbilt football" as a potential clue; students should try a letter and use context if stuck.

• Problem-solving approach: Letters need not be solved linearly; spacing out clues can help unlock surrounding letters.

• On-the-fly setup: The instructor uses a countdown (from ten) as a clock; if zero is reached without solving, that round goes to the instructors.

• Visual aids: There are letters written on a back wall (the board) and references to potentially building slides or tablets for illustrating points.

Key Concepts Discussed

• Concept introduced: dilution in startup financing.

• Context for dilution: common ownership and accelerators (like Y Combinator) and their impact on cap tables.

• Practical examples used in discussion:

  • An accelerator (e.g., Y Combinator) has a short time frame (about three months) from start to finish.

  • Time pressure can influence how founders raise money and how investors participate (risk of "dumb money").

  • High valuation does not protect existing shareholders from dilution; their percentage ownership can drop as new money comes in.

• Real-world reference: early OpenAI investors used as an illustrative example of dilution in practice.

• Financing modes discussed: bridge financing as a tool in hyped markets; some bridges are healthy, others are poor.

• Core indicator of scalability: gross margins as a key metric (the speaker calls it the “all-time cheat code”).

Dilution and Cap Tables

• What dilution is:

  • When a company raises additional money by issuing new shares, the percentage ownership of existing shareholders decreases.

• Why dilution happens:

  • New money increases the total number of shares outstanding, reducing the share of existing holders.

• Simple setup (definitions):

  • Let

  • $T_{ ext{old}}$ = total shares before the new round,

  • $S_{ ext{old}}$ = shares owned by a pre-existing investor,

  • $p<em>{ ext{old}} = rac{S</em>{ ext{old}}}{T_{ ext{old}}}$ = pre-dilution ownership.

• Post-dilution calculation:

  • A new round issues $riangle S$ new shares, so

  • $T<em>{ ext{new}} = T</em>{ ext{old}} + riangle S$

  • Existing investor’s post-dilution ownership is

  • $p<em>{ ext{new}} = rac{S</em>{ ext{old}}}{T<em>{ ext{new}}} = p</em>{ ext{old}} imes rac{T<em>{ ext{old}}}{T</em>{ ext{new}}} = rac{p<em>{ ext{old}}}{1 + rac{ riangle S}{T</em>{ ext{old}}}}.$

• Concrete examples:

  • Example 1: Suppose you own 7% of a company with 100 total shares (
    define as) $T<em>{ ext{old}} = 100, ext{ } S</em>{ ext{old}} = 7, ext{ } p_{ ext{old}} = 0.07.$ A new round issues 50 additional shares (
    $riangle S = 50$). Then

  • $T_{ ext{new}} = 150,$

  • $$p_{ ext{new}} = rac{7}{150} \